(John Kemp is a Reuters market analyst. The views expressed are
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By John Kemp
LONDON, April 26 U.S. oil and gas drilling costs
have started to rise in response to a surge in activity and are
set to increase further as the slack in the rig market declines.
Drilling costs increased by 7 percent between November 2016
and March 2017, according to preliminary data on producer prices
from the U.S. Bureau of Labor Statistics.
The increase has offset only a small part of the 34 percent
slump between March 2014 and November 2016 (tmsnrt.rs/2q6RNzc).
But it is the first sustained gain in three years for
drilling prices, which are now rising year-on-year for the first
time since November 2014.
Drilling prices are classified under the North American
Industry Classification System (NAICS) code 213111 for
“establishments primarily engaged in drilling oil and gas wells
for others on a contract or fee basis”.
Drilling prices do not include the cost of hydraulic
fracturing, which is classified separately under NAICS code
213112, and where the previous decline in prices and subsequent
recovery have been more muted.
Drilling costs have a strong cyclical component and track
changes in drilling activity with an average lag of two to three
The number of rigs drilling for oil and gas hit a cyclical
low at the end of May 2016 but has more than doubled since then
The rebound is the fastest for at least a quarter of a
century, according to rig counts published by oilfield services
company Baker Hughes.
The number of active rigs has risen from a low of 404 at the
end of May 2016 to 857 on April 21 and is still gaining by an
average of 10-20 per week (tmsnrt.rs/2p3GEOl).
Drilling prices will likely keep rising in the next few
months as the lagged effect of past increases in the rig count
filters through and rigs continue to be added.
Cost inflation for drilling as well as other inputs into the
exploration and production process will likely put upward
pressure on breakeven prices for U.S. shale firms.
Many shale producers report breakeven costs significantly
below $50 per barrel but those costs are likely to rise as
service companies push through price increases.
Service companies have repeatedly warned that the severe
cost compression that occurred between 2014 and 2016 was
unsustainable, and drilling costs would need to rise during any
So far, the rise in drilling prices has been limited because
of the large overhang of rigs stacked and crews idled during the
downturn, which have limited the pricing power of drilling
But as more of the drilling fleet is reactivated, drilling
companies are likely to regain some power to push through price
increases onto their customers.
“While the onshore rig count increase in North America has
been more robust than many had expected, the industry is still
working to absorb excess service capacity,” Baker Hughes
told investors on Tuesday.
“As this capacity is being consumed, we have seen labour and
materials cost inflation in select product lines and basins,”
the company wrote in its first-quarter earnings release.
“With the demand growth we experienced this quarter, we
believe we are on the cusp of a broader pricing recovery.”
(“Baker Hughes announces first-quarter results,” Baker Hughes,
(Editing by Dale Hudson)